Wednesday, December 31, 2008

New Year Doom

The Doc presents his 2009 economic outlook

So now Dr Doom reckons he's lost a packet in Mr Madeoffwithyourmoney's Doom Fund.

Well, that's all very well, but how do we know Henry "Dr Doom" Kaufman is the real Dr Doom? I mean anybody can claim to be the good Doctor, and these days there are any number of jokers doing just that.

Take Nouriel "Dr Doom" Roubini, the economics prof from NYU. He's for ever popping up on telly to scare our pants off, and is always introduced as Doc D:

Then there's Mark "Dr Doom" Faber, who is so doomy he actually publishes the Gloom, Boom and Doom Report:

Then there was Tony "Dr Doom" Dye, the City fund manager who sadly died this year.

Which one is the genuine article? How many do we need?

Do try to have a happy New Year.

Because as the Doctors Doom keep telling us, it sure ain't gonna be prosperous.

Tuesday, December 30, 2008

Festive News From BOM Correspondents

Cato on Keynesian economics* (HTP Steve B)

While Tyler has been slumped in front of his Xmas pressie, correspondents have continued to monitor the wasteland:


Tim S notes that the Indian company Tata - the very same Tata we are about to prop up with massive cash injections into their Jag and Land Rover subs (see this blog) - are all set to sponsor Ferrari . Fantastic taxpayer value.

A new Dark Age in Powys

Mister Brillo highlights the scandalous spending priorities of Powys County Council. In an area where income per head is 15% below the national average, and the Council is by far the largest employer, the pay of senior council employees is right up there with the best. According to an FOI submitted by an enraged local council tax payer, more than 1300 staff are paid more than £30 grand pa, with top salaries exceeding £100K - a considerable income in Powys.

The Council says it "has to pay good salaries to attract good people", but as our enraged taxpayer points out: “Our street lights have gone out, schools have been closed and public services such as local bus routes are either being ended or curtailed all in the interest of supposedly saving cash."

As for those street lights, the Council switched off 9000 of them because it decided local residents didn't really need them. It reckoned it could save £225,000 pa - about the cost of just two of its Executive Directors. Local residents were cast into the darkness to risk broken limbs and footpads. Appalled and frightened, many are trapped in their homes after dark. A local pensioner has been forced to pay £300 of his own money to get some lights back on in his village.

WTF? From schools to healthcare to policing to street lighting, the only sure way to get proper "public" services is to pay for them yourself.

A Bit Late Now Ltd

Sergio spotted this in the Times:

"Looking back 20 years, Pinter frankly admitted that he was to blame. “I was extremely neurotic at the time. I was so incensed about Thatcher, I just couldn’t control it . . .”

But, he added in a crescendo of rage, “the final irony was that we all wanted a Labour government, and what a f***ing shit house that has turned out to be! I mean, give me Thatcher every time! At least she wasn’t a hypocrite.”

Harold, mate, we're really going to miss the benefit of your wisdom.

Late, hideously over budget, and useless

JD highlights this from the Telegraph:

"Government computer projects are running a combined 86 years late and nearly £2 billion over budget...

The news comes after Whitehall officials were accused by the public spending watchdog of wasting £300 million of taxpayers' money every year on poorly managed contracts with private firms.

Figures from 18 Government departments show one in three – 95 out of 252 projects – had not been completed on time. More than one in five – 58 – are over budget... The biggest overrun was an IT scheme to help enforce child-maintenance payments at the Department for Work and Pensions, which is seven years late."

And all that excludes the NHS supercomputer...

Join the Untouchables... or the Touchyfeelables

John B thought we might all like to apply for a new job at HMRC - Proactive Intelligence Officer. Basically, you will be part of HMRC's Untouchables, charged with fearlessly investigating staff members who might be up to no good:

"You will be required to travel throughout the UK, with occasional overnight stays and to work anti-social hours, and will sometimes be required to respond at short notice. You will also be prepared to die in a hail of lead." (OK, I'm paraphrasing that last bit)

Fair enough - we taxpayers don't want corrupt tax officials. But Tyler can't help reflect that when he were a lad, corruption and criminality in the old Inland Revenue and HM Customs was virtually unheard of.

Or if untouchability doesn't suit, Ian M suggests you apply to the West Sussex Police for the touchy-feely contract to supply Indian head massage services to certain "specific departments" - wonder which ones? (and see Iain Dale's blog here).

Just remind me - why can't we just have real police and real criminal justice?

Cash and salt

Adrian P directs us to this from Nanny BBC:

"We all know that the average Christmas dinner is not the most healthy of meals - but new research has revealed it contains more than 11 grammes of salt, almost double the recommended maximum for an entire day.

The group Consensus Action on Salt and Health (CASH), analysed an average Christmas dinner for the BBC and found high levels of salt in all three courses."

How gob-smackingly amazing.

Adrian says:

"The appropriately named CASH studying the salt content of the average Christmas dinner. Asking a question nobody ever wanted asked and to which the answer can only be “Who gives a f-f-f-fig?”

And who pays? I imagine the BBC funded this project. However CASH also seems to get funding from the Food Standards Agency (see last paragraph
here). I would also hazard a guess that the link on their homepage for donations is one of the least clicked links on the whole internet (see here).

In summary, we seem to have two quangos - the BBC and the FSA - funding another quango to research something nobody cares about. It's a salt-free gravy train!"

Actually, CASH is a registered charity rather than a quango, but we take Adrian's point - we're paying for yet another unwanted helping of nanny state propaganda.

*Footnote - Yes, the Cato vid on Keynesian economics is a tad on the simplified side. But it does highlight how Keynes is once again being wheeled out by enthusiasts of Big Government to justify their expansion programme. In reality, Keynes' economics were far subtler than the "crass Keynesianism" deployed by socialist commissars like Gordo. K was much more concerned with our behavioural biases, how the madness of crowds can distort rational decision making, and how markets are rarely in equilibrium (hence Prof Leijonhufvud’s distinction between Keynesian Economics and the Economics of Keynes - see here). And K also famously reckoned government should be kept below 25% of the economy (cf our 40-45%).

Tuesday, December 23, 2008

Tidings Of Discomfort And Misery

Shouldn't Father Christmas look chirpier than this? And where's his hat?

Three very familiar items from this morning's depressing papers:

  1. Violence in schools - "Police are being called out to deal with 40 violent incidents in schools every day, prompting fresh fears over a breakdown in classroom discipline... the gang culture witnessed on many inner-city streets is spilling over into schools, with more young people bringing knives into lessons... a survey by the Association of Teachers and Lecturers found that one in 10 state school teachers has been injured by a violent pupil".
  2. Plague Hospitals - "Sir Richard Branson, who was recently appointed vice-president of the Patients Association, called for all hospital staff to be screened for the superbug MRSA and receive immediate treatment if infected... "There have been some improvements, but the facts speak for themselves - and the facts are still horrific. It feels like they have tinkered rather than really got to the heart of the problem. The hospitals are there to cure people. They are not there to kill people... In the airline industry if we had that kind of track record we would have been grounded years ago".
  3. Non-Policing - "Police are failing to investigate almost four in every ten crimes... Victims' groups have condemned this practice of 'screening out' offences - but it is alarmingly widespread. The Met, the country's largest force, decided that 51 per cent of crimes were not worth full investigations as there was little chance of catching the culprit. It said that in the 2007/8 financial year it screened out a total of 437,888 offences. These included 26,709 offences of violence, 338 sex attacks, 5,562 robberies and more than 60,000 burglaries. For burglary, the Met only investigate one in three cases reported to them. In Bedfordshire, which last year screened out 42 per cent of crimes, one in three burglaries doesn't get a full investigation."

Three dire failings right at the heart of our public services. And as regular readers will be well aware, these are failings that have been around ever since we started BOM nearly four years ago. Cost? Taken together, these three underperforming services - schools, health and police - now cost us north of £180bn pa, or £7 grand per household.

The really frustrating thing is that we know what needs to be done. Teachers need to be put back in charge of classroom discipline. Nurses need to be put back in charge of hospital hygiene. And policemen need to be put back in charge of policing. Plus of course, schools, hospitals, and police all need to be made directly accountable to their customers, not to the commissars.

The fundamental reason that Sir Dick's airline works so much better than the NHS (or Aeroflot) is because unless he delivers what the customer wants, he goes bust. Whereas our state schools, state hospitals, and state police don't. Even when their customers get so pissed off they take their biz elsewhere, they still have to pay to maintain the dysfunctional state service.

As it happens, I've just sampled the horror that is Sainsburys at Christmas. Now, there's a company that very nearly incinerated itself a few years back by getting too top-down, and losing track of customer service in the stores - our large store hit rock bottom when it literally ran out of potatoes one Xmas Eve.

But now - while by no means perfect - its stock control has definitely improved, and most impressively, you can sense a change of attitude among the staff. Today, the manager came on the tannoy and told us he hoped we were having a good experience in his store - if not, he had stationed himself at the door and he wanted to hear about it so he could put it right.

I've never heard that before, and I've never heard a store manager openly thank his staff and urge them on to greater efforts. It was an impressive testimony to the power of choice and competition*.

The Commissars mouth platitudes about customer choice, but when it comes to action, they never relinquish power. All they can ever think of is to issue more top-down directives to deal with the latest crisis headlines (eg MRSA). Even though we all know by now that top-down direction destroys initiative and customer focus at the sharp end, where it can actually make a real difference.

*Footnote -please don't tell me all Sainsburys managers have been ordered to make these human face store announcements. Please don't tell me I've been scammed by some evil PR stunt. It is Christmas after all. May we wish you all a happy one.

Monday, December 22, 2008

Super Show Darling

Peston in his youth
I've just watched a jaw-dropping BBC Panorama prog. "The Year Britain's Bubble Burst" was billed as a review of this cataclysmic year for our banks and the economy. In reality, it was a 30 min puff for our old chum Robert Peston, and that remarkable series of scoops he's credited with.

Indeed, so important has Peston now become, he himself didn't actually present the show at all. No, this was a show about him - a reporter and camera crew trailing him around the corridors of power on his mission to save the nation from evil bankers.

In reverential tones he was asked about this vital work, and invited to opine on "the way forward". We were treated to a potted life history, snaps of his early life, and even a glowing testimonial from his old dad - who just happens to be old Labour peer Lord Peston.

And what about those scoops, eh? What a cracking journo he must be, to ferret out all that secret info denied to the less talented:
  • Breaking the news that HMG was going to prop up the Crock

  • Breaking the news that HMG was going to allow Lloyds to take over HBOS

  • Breaking the news that HMG was going to prop up the rest of the banks

Hang on a sec, though... when you list them out like that, it's funny how they all seem to involve him breaking news of some fresh new HMG initiative just before it gets announced by HMG.

You'd almost think...

No... surely not... surely HMG wouldn't be using him as a tame pre-announcement conduit.

I mean, why would a pre-eminent journo like Robert Peston need to get involved in anything as devious and downright shite as that?

Just because he's the son of a Labour peer, doesn't mean he's a Labour supporter. In fact, he took the opportunity on this very programme to tell us he'd given up supporting any specific party when he became a financial journo: apparently, it's not appropriate.
And just because he and Darling were shown relaxing together, laughing about how they'd put one over on the evil bankers, doesn't mean Peston is in Darling's pocket.

And just because everyone we know in the City thinks Peston is little more than Labour's deniable propaganda arm, doesn't mean it's true.

Any more than those rumours of Santa's death are true.
PS Panorama normally goes up on the BBC's watch again iPlayer, so you can judge for yourself. Just make sure you equip yourself with a sick-bag.

Housing Disbenefit

Just down the road from Dave - £1755 pw

You will have seen the press reports about Francesca Walker and her £2m five bedroom house in Dave C's Notting Hill. Actually, it's only rented - at a mere £91 grand pa. But the choker is, we're paying for it.

Just like we paid for Afghan single mother Toorpakai Saiedi and her seven children to live in this £1.2million property in Ealing - part of her £170 grand pa welfare benefits (no wonder her son looks chilled):

Government regulations oblige local councils to house all kinds of people. According to the Sunday Times, Kensington and Chelsea Council had to house Ms Walker in a five bed house within the Royal Borough, and reckoned the £2m pad was the only suitable property available. Even though it is privately owned.

As we all understand by now, handing our wallets over to the Simple Shopper is never a good idea. But allowing the Shopper out in the shark infested waters of the property rental market is asking to get our hands chomped off as well.

When last sighted (2006-07), spending on Housing Benefit amounted to £13bn pa. Our guess is that it is now close to £15bn pa, and will be shooting up in the slump. So it's big. And it raises all the usual questions.

First, can we trust the Shopper to get value for money? The ST easily found an alternative five bed property within the Royal Borough for half the price of the one rented for Ms Walker. As usual, the Shopper has paid way over the odds.

Second, can we trust the Shopper to spot fraudsters? The property rental market is notorious for right dodgy geezers who'd swindle their own grannies, let alone the local council. Especially when the local council is not handing out its own dosh - they get fully reimbursed by the Department for Work and Pensions, a surefire recipe for overpayment.

Sure enough, the Shopper gets legged over left right and centre. According to the latest National Audit Office fraud drains-up (blogged here), as much as £0.9bn of Housing Benefits payments went walkabout in 2006-07. Indeed, Housing Benefits handed out to working age people like Ms Walker and Ms Saiedi had by far the highest incidence of overpayment of any welfare benefit - up to 7%... and that's only what they estimate.

Third, can we trust the Shopper to come up with an even halfway rational system for ensuring its own purchases don't drive up the market price of rentals?


Last week - before news of Ms Walker - we received a couple of very interesting emails from property expert Richard B. He explains precisely how the current system of Local Housing Allowances -the basis of Housing Benefits paid on private rentals - works:

"The amount paid in each area is determined by the Department of Work and Pensions which publishes figures each month showing what the median rent is for different sized properties in a given geographic area. People can claim up to the median rent for the type of property they require, with their requirements determined by the size of their family."

But as Richard points out:

"The Local Housing Allowance, because it is based on the median rent, is creating an ever-rising floor for rental rates that is completely disconnected from local incomes. If you're a landlord, why would you rent for anything less than the LHA even if 50% of local workers don't have the incomes to pay the LHA rents?

It's free money. As landlords raise their rents to the LHA level, when the rates are recalculated each year, the lower 50% of the distribution has been truncated so the median will be progressively higher and higher following each round of recalculation. At the same time, because the government is guaranteeing landlords an above market rent, it drives up property prices and prices people who are actually working out of the housing market."

This is classic Shopper. The DWP has assumed it can somehow impose its benefits system on the world without affecting the way the world behaves. It has entirely ignored the horrific rent boosting feedback loop Richard describes.

But there's worse.

Richard is so concerned - nay, incensed - by this, he has trawled back through government websites, to compare the old DWP housing allowance rates with the new ones. And he has discovered that they have gone through the roof over the last year:

"As of 31st March 2007, housing allowance in central London for a 5 bed property was 737.50 pounds per week. As of December 2008, that allowance is now 1,950 per week. For 2 bed properties, the housing allowance in central London went from £400 per week to £540 per week. All of this is happening when market rents are supposedly declining."

Arithmetic check - £737.50 to £1950 is a 164% increase.


Richard explains:

"In previous years the Department of Work and Pensions classified the size of houses by counting the total number of rooms. Thus a house with a lounge and 2 bedrooms and a house with a lounge, a dining room and a bedroom would both be counted as houses with 3 rooms and appropriate for a family needing 2 bedrooms.

Now, they look at the number of bedrooms when calculating property sizes and determining median rents in the area when setting the guide for housing allowance. This means that the house with a lounge, dining room and a bedroom is now counted as a 1 bed property, which, if you were to include it in the pool of 1 bedroom properties, would most likely raise the average rent for that size property.

This effect is probably small for 1 and 2 bed flats, but at the larger end of the scale, it could be huge, and that's where you see the biggest jump in housing allowances between last year and this year. There's a huge difference in market rents between a 3 bed property with a dining room and a study, and a 5 bed place with a dining room, study, conservatory, indoor pool, etc, but the DWP is now lumping them all together."

We're spitting blood.

At a time when we're all being forced to watch the pennies, how dare these arrogant incompetent clowns at the DWP throw billions of our money around like this?

None of us wants to see people without a roof over their heads, but I'm sorry, if you have to throw your self and your five kids on the taxpayer's mercy, you should not expect to be housed in a £2m pad next door to Dave.

And landlords who want to rent to DSS cases (as they still seem to be called) should never expect top dollar. In exchange for the certainty of payment we'd impose an automatic 25% discount off the open market rental.

(Big HTP to Richard B)

Friday, December 19, 2008

Picking Losers

A great way to shred £40bn

It's all so long ago now. But as Tyler recalls it, Labour didn't actually manage to pick any winners during the 70s.

Take Inmos, a computer chip maker funded by Labour's neo-Stalinist National Enterprise Board. That was supposedly going to catapult us forward into the white heat of a hi-tech industrial doobry.

Inmos ended up costing taxpayers over £211m (about £1.5bn in today's terms) and never making a profit (although in fairness it was finally flogged off by Thatch at a loss only running into tens of millions - call it £0.5bn today).

In similar white hot vein, there was ICL, Cambridge Instruments, NEXOS... well that's what it says down here, anyway. You've perhaps never heard of them because most were only ever kept going by government contracts, and have long since gone phut.

Actually, even their government contracts were only awarded for stuff nobody cared about - when Tyler worked at HM Treasury in the late 70s, and the IMF was insisting we make a proper effort to stay on top of the spinning dials, the office computer had to be American because the ICL offering wasn't deemed capable of cooking crunching the numbers adequately.

Then there was the motorbike manufacturer that produced temperamental bikes nobody wanted to buy... or was that later? Then there was... umm... ah... well, surely there was something else... ah yes - of course - Roll Royce.

Rolls Royce was the great success story of 70's government intervention. When it blew up over-reaching on the RB211 jet engine development, Heath nationalised it. But it did go on to prosper, and when it was privatised again in 1987, taxpayers copped £1.4bn... except that takes no account of all the loan capital we'd supplied in the interim - net net it was probably a wash.

Virtually everything else turned into a money-pit. And the money-pit to end all money-pits was the car industry.

It is reckoned that BL alone cost taxpayers nearly £3bn in direct subsidy (1975-1988) - in today's terms that's £15-20bn (plus the final £250m sting in the tail we blogged here).

And the overall cost was even higher than that, because for years UK car prices were kept artificially high in order to protect BL. That was done via a "gentlemens agreement" with the Japanese manufacturers, under which their exports to the UK were restricted. Over the years that probably doubled the support costs - ie an overall bill in today's terms of £30-40 bn. And that leaves out the support to all the other manufacturers, such as the Rootes/Chrysler disaster.

So here we are again: a Labour government about to bail out the car industry; a Labour government about to pour billions more of our cash into that same old money pit.


To be honest, we can't really improve on this excellent defence of taxpayers' interests by Martin Vander Weyer. As he says:

"The car industry around the world is overdue for a shake-out, in which model ranges and production levels may have to be drastically cut – and major investments made in new technologies for the 21st century. In the next wave, fewer cars will be built in high-wage economies, and more built in China, India, Turkey and Latin America. The only western factories that prosper will be those that are extremely efficient and at the cutting edge of technology, both in terms of what goes into cars and how they are put together...

Ford invested billions in modernisation [at Jaguar] but could not make it a consistently profitable business. It needs another wave of investment to make its model range greener and to bring its image up to date..."

And jobs? When BL was bailed out in the 70s, it employed over 150,000 directly, and over half a million more indirectly. But now, Jaguar/Land Rover only employ 15,000 directly, and at most, 60,000 indirectly. The bulk of the 800,000 employed in the motor industry overall (including the garage biz) would not be affected if the company went under.

So why is it one rule for the evil banks and another for honest manufacturers?

It isn't. The only reason we're bailing out the banks is that they are vital infrastructure for a modern economy in a way that motor manufacturers aren't. We most definitely aren't protecting banking jobs - so far this year its reckoned that 65,000 jobs have gone in financial services, and the pain most certainly ain't over yet.

And there's one other important point. We're already giving massive support to our car manufacturers, via the 25% fall in sterling. That's a big boost to their competitiveness - good - but as we've blogged ad nauseam, it costs the rest of us a packet.

It's back to the 70s alright. We'd better just hope Labour don't manage to collect too many lame ducks before the creditors call time.

Thursday, December 18, 2008

Yea, Verily I Say Unto You...

We are being robbed and left for dead

Great to see the Good Samaritan is still in business. The Chief Druid somehow overlooked him this morning as he likened Gordo's fiscal stimulus package to an "addict returning to the drug". But later the Dear Leader reminded us that he himself is the GS - the GS incarnate. And no matter what stones the druids may cast, he will not "walk by on the other side when people are facing problems".

Of course, as Maggie was wont to observe, "no one would remember the Good Samaritan if he'd only had good intentions; he had money as well." So it's just as well the DL has plenty of that.

Or rather, it's just as well he has unfettered access to our wallets and credit card.

Today we got the latest card statement.


Public sector borrowing was £16bn in November - the worst since records began. And our cumulative borrowing since the start of the year is already £56bn - twice what it was at the same stage last year. There's simply no way we're going to stick within Darling's £78bn PBR forecast for the whole year, even though it was made just three weeks ago. Borrowing, my friends, is out of control.

But hey, that's OK because we're in a serious recession, there are lots of people facing problems who need our help, and anyway we can always finance everything by running the printing press.

That last point has been the subject of much comment in recent days. Right now, it is said, governments don't need to worry too much about how to finance their huge budget deficits. Apart from the fact that panicked investors are desperate to stuff their cash into "safe" government bonds, the deflationary forces at play in the global economy are so strong that governments can safely print all the cash needed to pay the bills - there won't be an inflationary consequence.

Well... there won't be an inflationary consequence so long as governments remember to drain all the cash back out again just as soon as the global economy starts to recover. However, if they somehow forget to do that, we'll be in for the mofo of all stagflationary nightmares.

Feel lucky?

It reminds us of the Greater Fool Theory that always takes hold during financial bubbles - buy, buy, buy... and don't worry about buying wildly over-priced assets because there will always be time to sell them to The Greater Fool just before the ordure hits the proverbial.

In this case, it's print, print, print... and don't worry about printing too much because there will always be time to drain it off through bond sales to The Greater Fool just before the ordure etc.

The only problem being that The Greater Fool never seems to be around when you actually need him.

A bit like the self-funding Good Samaritan.

Martin Woolf had another good article yesterday on precisely this subject. He says: "Once inflation returns, the central bank will need to sell assets into the market, to mop up the excess money it has created in fighting deflation. Similarly, the government must reduce its deficit to a size it can finance in the market. Otherwise, deflationary expectations may swiftly turn into expectations of above-target inflation. This may also happen if the debt sold in efforts to sterilise the monetary overhang is deemed beyond the government’s ability to service." Note that last sentence very carefully. It means that we cannot rely on the Greater Fool to meekly buy hundreds of billions of HMG debt in 2 or 3 years time just to help HMG mop up today's prospective excesses with the printing press. If we don't maintain some semblance of fiscal and monetary discipline now, we shred our credit capacity and we're straight back to the plunging pound, sky-high interest rates, and inflation of the 70s and 80s. A real frying pan/fire job.

Trust The People. Not.

Do you want him running Cheltenham?

Well, we never thought Labour would go ahead with its supposed plan to allow direct elections to police authorities. And sure enough they've now canned the whole thing.

They reckon they can't go ahead because allowing such elections might "politicise" the police. Jacqui says:
"There is a real risk that something that is very important in British policing -about non-politicisation – is at risk of being undermined."
As we all know, Westminster politicos hate the idea of real local democracy - who knows what rabble might take control? So once again they've decided the people can just get stuffed - if we don't like what's on offer from our Westminster oligopolists, too bad.

On BOM we remain fully committed to our elected local sheriffs (see many previous blogs). We think local policing should be directly accountable to local communities, and direct elections are by far the most powerful way of achieving that.

We also have much more confidence in the good sense of British voters than Labour have. Unlike them, we don't believe Westminster control is all that stands between us and Reinhard Heydrich running Cheltenham.

This is a classic example of our Commissariat insider elite ensuring that the people remain firmly on the outside. And that our police are bound ever more tightly into serving the state.

Wednesday, December 17, 2008


Complacency is an occupational hazard for all big organisations. And no organisations are bigger than Big Government.

According to Lord Sutherland, whose damning report on the SATs fiasco has just been published, complacency was a serious problem at the Qualifications and Curriculum Authority (QCA). As he puts it:

"There was a culture within the [QCA] that it would be alright on the night."

We come across this culture right across Whitehall – an unwillingness to recognise and grip problems early on, and an assumption that “muddle through” will somehow produce an acceptable result on the night.

And it isn’t confined to the UK government – it’s endemic in governments right around the world.

Take, for example, the latest revelations about the US Securities and Exchange Commission (SEC). It seems they failed spectacularly to regulate Mr Madeoffwithyourmoney. According to the head of the SEC himself, "credible and specific allegations" about Madoff had been "repeatedly" brought to the attention of the SEC, yet no investigations were ordered.

Why? This may turn out to be the biggest Wall Street scam ever, but it was hardly novel. The regulators should have been fully aware of how Ponzi schemes work, yet they did nothing. They simply assumed that everything would somehow be alright on the night.

Our own sweet financial regulator has been even more complacent. The Treasury Select Committee said the FSA had been so complacent during the go-go markets, it had been asleep at the wheel, and the FSA’s own report on its feeble attempts to regulate the Crock admits as much (see this blog).

Central bankers have done little better. Alan Greenspan’s memoir The Age of Turbulence was written just before the financial crisis broke, and it is stuffed full of complacent statements about how bank shareholders could be relied upon to rein in excessive risk taking, and how complex derivatives are a force for good.

But at least Greenspan has had the integrity to admit publicly that he was wrong. Others have not been so forthcoming about their own pre-crisis complacency. Take the Dear Leader – as the FT Westminster blog brilliantly reminded us yesterday, right up until the moment the balloon went pop, Brown was complacently lecturing us about how he’d abolished housing bubbles and boom ‘n’ bust. And unless I missed it, there’s been no retraction, still less an apology.

So why is Big Government so complacent?

We all know why.

It isn’t just that it’s Big.

It’s because it is a monopoly supplier of everything from financial regulation to state exams. It can afford a degree of complacency that would sink a commercial firm.

PS The Madoff saga – indeed much of the current banking crisis – has a huge ring of familiarity. Here we have senior bankers and fund managers who poured billions into an operation that they did not understand, purely on the basis that it was making money. It is precisely how the top management of Barings busted their bank only a little over a decade ago.

Tuesday, December 16, 2008

Public Sector Pensions - Ticking Gets Louder

He never mentioned the cost of his pension

As BOM readers are well aware, Britain's £1 trillion plus unfunded public pensions liability is a huge ticking time bomb buried in the heart of our public finances. And every now and again the ticking gets alarmingly louder.

Today was one of those days. We heard from My Lord Mandy that as part of his Post Office privatisation plan, the taxpayer is to take full responsibility for the PO's £22bn pension fund liabilities - there being no way any private sector buyer/partner would ever take on such lunacy.

Now, the important thing to understand about the PO pension fund is just that - it is a fund. Unlike in most of the public sector, Post Office pension contributions have actually been invested in proper assets, such as equities. So in theory, the pensions can be paid by drawing down the assets, and there should be no future burden on taxpayers.

Yeah. If only.

In reality, as we've blogged before, the contributions have been insufficient to meet the liabilities, and there's a £7bn shortfall in the value of the assets. It's a shortfall we taxpayers will have to make up. Worse, although My Lord M didn't mention it this afternoon, that shortfall will have been increased bigtime by the recent financial market crash.

And it isn't just the Post Office. As we blogged here, its original stablemate - BT - was privatised a quarter century ago, yet we are still guaranteeing £28bn of its liabilities. The same guarantee also reportedly applies to the pension liabilities of around 20 other privatised companies, including the £15bn Railways Pension Scheme, the £10bn British Coal Staff Superannuation Scheme, and the £13bn Mineworkers’ Pension Scheme. All told, it must be North of £100bn.

The other piece of public pensions news today of course was the overpayment to tens of thousands of retired public employees. The error has supposedly cost taxpayers around £100m, but given that it's apparently been going on since the 70s, our guess is that the true cost is much higher.

The real worry is that with public pensions payments already running at over £20 bn pa and heading much higher, even apparently small errors can cost us a stack of money.

Inefficiency Drive

Government doesn't do efficiency. We all know that.

So WTF does it keep trying to run efficiency programmes? Surely someone up there must have noticed they don't work. Surely someone must have registered how the shambolic Gershon programme turned into an expensive Marx Brothers farce (see many previous blogs gathered here).

Today we hear of a fresh disaster at the Department for Transport. An efficiency programme "designed" to save £57m ended up costing us £81m. Problems included yet another malfunctioning new computer system - this one so haywire it ended up "barking instructions in German" (HTP Mr Naughty).

PAC Chairman Leigh is running out of whatever the opposite of superlatives is: "stupendous incompetence... one of the worst cases of project management seen by this Committee... lamentable."

There are some oh-so-familiar features here. It's not just the badly specced badly managed malfunctioning computer system, there's also the wild understimating of prospective costs (which over-ran by 120%), and the overestimating of benefits (which undershot by 65%).

This is absolutely typical of public sector efficiency programmes: they almost always involve an underestimated increase in spending made against an arm-waving promise of implausible savings somewhere down the line (cf the disastrous NHS supercomputer).

Another favourite is deckchair rearrangement.

BOM readers will be familiar with the Learning and Skills Council (LSC), the abysmally hopeless quango that presides over the nationalised "skills industry". It's an underperforming quagmire of 500 separate organisations and bureaucracies costing us over £12bn pa, yet failing to deliver anything that employers value in terms of skills (see previous blogs here - including video - here, and here).

So earlier this year, amid a rising scream of criticism, the government claimed it was closing the LSC.

Closing? As decisive as that?

Er, no.

Yesterday we learned the truth - it's another deckchair job.

According to the official plans just issued by the Department for Children Schools and Families, the LSC will be split into three. There will be a Young People’s Learning Agency (another quango), a Skills Funding Agency (yet another quango), and a rump which will be bundled off to local councils. The organisation will even more opaque (see sample organomissionstatementwibblechart above). But the number of people employed will remain completely unchanged. The nameplates on the front doors will change, but there will be no saving whatsoever. Indeed, the chances are that costs will increase, if only by the cost of planning and executing the deckchair shuffle (HTP MR).

The truth is that government is simply not capable of making itself more efficient. Maggie tried, Blair tried, and in his own way, even Gordo tried. They all failed. Indeed, their attempts have generally made things worse.

The only way we can hope to get more efficient government is to break it up. Without choice and competition as the driver, efficiency doesn't stand a chance.

Monday, December 15, 2008

Urinating On Labour's Debt Bubble

That's what I call a bubble

[Warning - this blog has got quite long]

As our German friends reminded us last week, we Brits are currently perched atop a highly unstable - and rapidly deflating - debt bubble. They say there's nothing much we can do about it, and we'll just have to let nature take its course.

But Our Beloved Leader and his supporters beg to differ. He tells us there are things that can be done, and he's doing them. Unlike the evil do-nothing Tories.

So who's right, I wonder?

The first thing to understand is that our debt bubble is big. Big, big, BIG. As the chart above shows, our total debt - even excluding the balance sheet liabilities of our banks - has grown hugely over the last decade.

In the decade up to 1997, the combined debt of households, companies, and government increased from around 180% of GDP up to around 200% - up by one-tenth. But in the last decade, the one under prudent Chancellor Brown, it's grown from 200% to 300%.

This is Labour's Debt Bubble and it amounts to a staggering £2.5 trillion - ie £2,500,000,000,000. Which is £100,000 for every single British household.

And please grasp two key points about that gob-smacking number.

First, it's just the additional debt we've built up since 1997 - we already had £1.7 trillion of debt to start with.

And second, it excludes the debt of the banking sector. This extra £2.5 trillion relates just to the debts taken on by "Real World" entities like families, manufacturers, and the government. It does not include the further trillions of debt accumulated by our banks, whose total liabilities when last sighted stood at a pant-wetting £6 trillion.

So who's done all this borrowing?

The following chart shows how that £2.5 trillion (£2,500 bn) breaks down between non-financial companies, households, and government.

As we can see, companies, households, and government have all contributed. But the worst culprits have been households and companies.

Reckless household borrowing we all know about, so it's no surprise to find they borrowed practically £1 trillion over the last decade.

The massive £1.2 trillion borrowing splurge by companies might come as a surprise. After all, haven't companies been doing rather well for most of the last decade? Why have they borrowed?

The explanation is that in an era of cheap credit, companies have been deliberately gearing themselves up in order to boost the returns to equity holders - including of course, their own senior managements, and in many cases their private equity investors. That's been going on all over the world, but here in the UK, the whole trend was strongly reinforced by Gordo's notorious 1997 pensions tax grab, which not only robbed pensioners, but also had the effect of reducing the relative cost of debt finance to companies (see this blog).

And what about government borrowing? Judging from the chart, the government has been abstemious in the extreme, contributing "a mere" £320bn to the blow-out.

But the trouble is, that was borrowing in a boom, when government shouldn't have been borrowing at all. Now we're in a bust, future borrowing is set to rocket. Even the government now admits to a further £0.5 trillion over the next five years, and the true figure will be much higher still. BOM's fag packet says it could easily be £0.7-0.8 trillion (we'll be running our doomsday calculator again soon).

And all of these figures exclude the hundreds of billions of additional debt being taken on to shore up the banking system (the government's so-called "financial sector interventions"), they exclude the blanket guarantees given on £6 trillion of bank deposits, and they exclude all those other off-balance sheet Enron items like public pensions and PFI (see this blog).

So what happens now?

First, Labour's debt bubble will deflate - probably a lot - as households and companies put the brake on new borrowing and pay off existing loans. It's called deleveraging and it's already happening.

Second, the government's share will get much bigger as its borrowing explodes. And the more Brown goes on "doing something" - ie splurging taxpayers' cash around - the faster that's going to happen.

One effect will be to transfer the burden of debt from the profligate to the righteous (aka taxpaying savers - eg see this blog).

But the other effect - the one Brown bangs on about - is that it might cushion our economy against the slump.

Will it?

BOM is squarely with the Germans and the Tories on that one.

When you understand the sheer size of our debt bubble, you understand that even government cannot keep it inflated. £2.5 trillion of debt is way beyond the credit capacity of HMG (see many previous blogs).

Indeed, when you stand it up against the mighty deflationary wind roaring out of a busted £2.5 trillion bubble, Brown's much hyped £20 billion fiscal package really is pissing into said wind. And if you've ever tried such pissing, you will know that any immediate relief is soon followed by very cold wet legs and an irresistable urge to go again.

Treasury officials almost certainly understand this. They surely understand how bad the fiscal position really is, and realise we cannot sustain a meaningful reflation.

A painful adjustment is unavoidable, and we need government to keep its legs dry. If government succombs to the cold as well, we really will be in trouble.

PS Jeff D sent us a link to an interesting post on the US debt bubble. Under the snappy title Den of Liars, Karl Denninger lays into America's rulers for lying to the public about the extent to which US growth has been driven by debt accumulation.

He points out that the US accumulation of additional debt between 2000 and 2007 was $23 trillion, whereas the accumulated additional money GDP over that period only totalled $14 trillion. So the growth of debt exceeded the additional GDP by $9 trillion. And blowing off that froth, in some sense, real underlying GDP must have actually fallen. As he puts it:

"Taken-on-debt that is spent is not actual output expansion any more than I am "improving my wealth" if I go borrow $200,000! In fact I am damaging it because I must not only pay the $200,000 back I must pay interest as well!

That's right folks - we haven't had an expansion in GDP over the last eight years. Congress and its organs of reporting economic "facts" have lied. We have in fact actually seen about a 10% contraction in real GDP from 2000 levels; all of the so-called "expansion" of the Bush Administration has been a lie intended to prevent recognition and working through of the recession that should have happened in 2000."

And Karl has the following Debt/GDP chart to give us some historic perspective:

Now, we realise that the precise validity of Karl's GDP minus debt calculation is a little dubious, but the Big Picture is striking. So just for fun, let's apply his arithmetic to Labour's growth record.

Between 1997 and 2007, money GDP increased by a cumulative £2.9 trillion (ie summing each year's increase in GDP over the 1997 starting point); debt increased by £2.5 trillion; so GDP "net" of debt increased by £0.4 trillion. Which is at least better than the US result.

But even so, on this basis 86% of our 35% real GDP growth since 1997 was "debt funded". And if we were to "give back" all of that additional growth, our GDP would need to fall by over 20% from current levels.


(And to really buck yourself up, see this blog for how the ongoing implosion of financial services might impact GDP)

Sunday, December 14, 2008

News From BOM Correspondents - 12

It's keeping him amused anyway

Latest news and links from BOM correspondents:

Paying for failure

1. Ken Boston - QCA

Our old friend Boston has finally been forced to resign from heading the Qualifications and Curriculum Authority (QCA) - but only because the forthcoming report into the SATS fiasco (see this blog) is so damning that even someone with his brass neck and impeccable lefty credentials couldn't be kept on.

He has been an utter failure at QCA, presiding over a further dumbing down of exam standards so massive that many private schools are abandoning the state exams altogether. Yet we taxpayers have been forced to pay him handsomely. On top of his £328K pay deal - including a £50k pa rent allowance - we also paid his £2,500 pa membership fees for the exclusive Royal Sydney Yacht Squadron and £30k pa of personal air travel for him and his family.

He was left in his lucrative post for 6 disastrous years. (HTPs SK, George)

2. Andy Duncan - C4

Publicly owned and taxpayer subsidised (via free spectrum) Channel 4 is demanding taxpayers' cash to stave off financial meltdown. But that doesn't seem to impact the pay of station head Duncan , who "is poised to receive the loyalty payment of up to £450,000 next summer, taking his total remuneration to more than £1m."

Speaking as taxpayers who are constantly incensed by C4's lefty news coverage, the Major and I wish to state quite categorically that we do not want Duncan's loyalty. We want him to sling his proverbial, pdq, and take the Bishop with him.

Paying for parties

The cash-strapped private sector may have canned Christmas, but in the public sector the party's still on:

1. £2500 per head culture nosh

"Andy Burnham, the Culture Secretary, spent almost £50,000 on providing hospitality for just 20 guests, who included Mark Thompson, the director general of the BBC, and Andy Duncan, the Channel 4 boss [er... didn't we just do him?].

A reception at the Walker Art Gallery, in Liverpool, last month was followed by a dinner at one of the city's most expensive restaurants, the London Carriage Works. The dinner, for members of the arts and media world, included £46 bottles of wine and Eton Hall venison.

Burnham's spokesman says: "This initiative aims to boost the UK's creative industries. The benefits to the economy during these difficult financial times will far outweigh the costs". (HTP Alan D)

2. NHS lights up Blackpool

"Health officials spent £30,000 on a black tie party for 420 NHS doctors, nurses and care workers.

Jugglers, confetti cannons, DJs and singers entertained guests at the event, which was held at the Hilton Hotel in Blackpool. NHS staff paid £5 each towards the cost of the celebration, whose cost worked out at about £70 a head.

Joan Humble, Labour MP for Blackpool North and Fleetwood, said: "I'm very proud of the NHS staff, but the question is whether it is wise to have spent £30,000 on a party at a time when people are feeling the effects of the credit crunch, and I can understand people's anger." (HTP Jo)

Paying for luxuries

You may be belt-tightening, but the public sector sure ain't:

1. Art

Having spectacularly failed to raise anything like the required £50m from private donors - surprise, surprise - the National Galleries of Scotland have blagged at least £42m from us taxpayers to buy Titian's painting Diana and Actaeon.

Don't get me wrong - I'm quite partial to the odd bit of Titian myself, and my old Art Master was for ever going on about how Titian was the greatest artist in the history of art. But a) the painting was not facing destruction, and anyway we've got loads of snaps, b) Britain has no God-given right to own this Italian masterpiece, c) we ain't got noooooooo money, honey, and d) taxpayers should never be forced to subsidise art (see many previous blogs).

2. Yachts

Via Pete S and Nottingham is Crap, earlier this year Nottingham Council hired a luxury yacht, moored at a prime spot down in Cannes, and threw a series of junkets for God knows what freeloaders and hangers-on.

According to the Council, the ‘pi├Ęce de resistence’ was its party on the beach for 300 guests... the must-see ‘Nottingham Club’ party was held in a marquee on a section of the beach opposite the Carlton Hotel".

Wonder why Mrs T and I weren't invited.

3. Olympics

The dismal trail of friviloity continues unabated.

First, Tess blurted out that they'd never have bid for the damned thing in the first place had anyone pointed out to them that the good times might not roll on for ever.

Second, there's no private money available for anything, adding billions to the taxpayer bill.

Third, we now know for sure that the much touted economic/regeneration benefits of the Games were never more than fantasy. And our rulers knew it from their own internal reports.

We have been played for fools by a bunch of liars and fantasists, and as we've always said, it will cost us £20bn (see all previous 2012 blogs here).

4. Plush billets

Justice Secretary Jack Straw will be spending £130m of your money doing up his new offices in desirable Queen Anne's Gate alongside St James' Park SW1.

"The remodelling of the tower block, next to St James' Park in London, cost £915 a square foot to complete – around 18 times more than a standard refurbishment would cost in the private sector.

In addition to the refurbishment costs, £2,745,000 was lavished on new furniture and fittings for the offices and £290,000 was spent on artwork."


Paying for bubbles lollipops and flipflops

Pete S spotted this:

"A thousand colourful bubble blowers are to be handed out to revellers in Bolton centre.The aim is to encourage drinkers leaving pubs and clubs to focus on playfully blowing bubbles on their way home, instead of getting into scuffles. It is the latest initiative to curb alcohol-related anti-social behaviour.

The blue and orange bubble blowers, which double as pens, will be handed out by Police Community Support Officers and town centre ambassadors on Saturday nights in December.

In recent years Manchester police have handed out lollipops to stop people shouting in the street after nights out. Women in Devon, spotted staggering home in high heels or bare feet, are being given flip-flops."

Friday, December 12, 2008

Spinning The Stats

A scholar and a gentleman

Sir Michael Scholar is a mandarin of the old school: those Oxbridge men of myth and legend who believed duty to country always trumps duty to some here-today-gone-tomorrow politico.

Such men abhor the media spotlight. Yet Sir Michael - the head of our brand new UK Statistics Authority (UKSA) - is so outraged by NuLab's misuse and corruption of Britain's official statistics that he has spent most of today giving radio and TV interviews on the subject.

At issue is No 10 and the Home Office publishing statistics on knife crime against the specific wishes of the Office for National Statistics, who are supposedly responsible for their release. It is a clear case of misusing official stats for the purposes of political manipulation, and it is directly contrary to much trumpeted assurances from Gordo that all such releases would henceforth be under the control of government statisticians and Sir Michael's independent oversight Authority.
In Sir M's measured words:
"There is a code designed to prevent political manipulation and my authority was set up to police this code. I am sorry to say the Home Office and No 10 broke these rules."

Bad enough. But this is the tip of a very ugly Home Office stats iceberg.

Regular BOM readers will be familiar with the HO's disgraceful form on manipulating crime stats, and their even more disgraceful refusal to allow their key stats to be produced independently by the ONS (eg see this blog).

Of course, such systematic manipulation comes at a cost. As Sir Michael has been highlighting in his interviews today, 4 out of 5 of us now say we don't trust official stats. Which for an advanced economy is a stunning failure, and shows just how far Nulab have corrupted an essential part of our national infrastructure.

We need to remember what Sir M is saying today. And the next time Mark, David, and Danny tell us we're rabid right wingers for disbelieving the rosy glow of the government's latest crime stats, we'll suggest they go and have a quiet chat with a real old-time mandarin.

Cutting Off Our Vital Organs

Not an instrument of reform

The Times headline hits the nail on the head: "Armed Services take first big hit in public spending":

"Two programmes worth £20 billion will be cut and delayed after defence chiefs were told that there was not enough money to go ahead as planned.

The announcement throws into disarray the Army’s £16 billion update to armoured vehicles, while the Royal Navy’s £3.9 billion project for two new 65,000-tonne aircraft carriers is postponed for two years."

Defence procurement is always the first casualty of spending war, and in a crisis, governments invariably give British jobs priority over military needs. Lewis Page has an excellent summary:

"Mr Hutton has decided to pour cash into the lame-duck UK helicopter industry and to postpone spending on the Royal Navy's planned aircraft carriers. He has also decided to have a new competition for the Army's vehicles budget, as the last one was won by a non-UK company."

BOM readers will be familiar with the splendid ex-Navy Mr L (eg see this blog), and to non-military types like Tyler he always talks a lot of sense.

Here, he explains how the 2 year postponement of the carriers will end up costing taxpayers even more because "the nature of defence projects is to cost more as they last longer". He also reminds us how the "Buy British" policy applied to the choppers and trucks is little more than pork barrelling, costing taxpayers a fortune, and delivering inferior equipment years behind schedule. On the choppers:

"... we could have ordered Seahawks and Blackhawks instead of Lynxes, getting bigger and more powerful choppers - and ones for which parts and support would be cheaper (the world Seahawk/Blackhawk fleet is huge, offering economies of scale the Lynx will never match). We'd be getting those aircraft right now, and our troops would be very pleased with us right now - not waiting another four years for inferior substitutes which will cost more to run.

We could then give the 900 sacked workers in Yeovil payoffs of half a million pounds each: and we would still have saved nearly a quarter of a billion pounds compared to what we are doing in reality."

Gah! No, I can't take any more of that - read it yourself.

But the main point is that just like the 1970s, Britain is once again entering a prolonged period of public spending cuts. And the lesson of history is that governments are terrible at directing those cuts rationally. Far from eliminating the fat that has built up through the boom years, they end up debilitating large parts of our public services by axing vital investment, and applying the same starvation diet to all organs of the state, irrespective of their importance.

Let's remind ourselves how it works.

First to go is capital spending. As Lewis Page notes, that carrier delay signals their likely axing post-election. And in the Pre-Budget Report, by far the biggest spending cuts in the out-years are in capital spending. There's much more to come, and vital programmes like new prison building will get pushed back for a decade - even though crime is likely to soar in the recession (like we've said before, you need to arm yourself, now).

Second, all departmental spending limits are subjected to a pro-rata haircut. It's simply too hard to get spending ministers to accept larger cuts for their own departments in order to boost some favoured "colleague". Right now, for obvious reasons, both main parties are saying they'll exempt the sacred NHS from that blunt instrument, but trust me, as the haircuts get more severe, other spending ministers will insist on the £100bn NHS taking its "fair share".

And inside the departments themselves, the same logic applies - it's simply too hard to axe whole functions, so everything has to take the same haircut. The commercial banks are now biting bullets all over the place and closing entire operations. But they're been driven by the so-called value imperative - ie the need to make a profit and satisfy their angry shareholders.

Third, public sector pay gets crammed down. Fair enough, you say, given all the pain elsewhere. But remember, public employees are much more heavily unionised than private employees, and as we blogged here, the average public sector worker goes on strike well over 100 times more frequently than his private sector counterpart. Public services crumble in the face of a huge increase in strikes.

You know what? I can't go on with this because I'm depressing myself again.

In theory, an outright necessity to cut public spending is an opportunity - an opportunity to get the public sector in shape. We could eliminate activities that don't need doing (like those notorious Regional Development Agencies, and the rafts of Labour's useless inspectorates), and we could introduce efficiency-raising choice and competition right across our public services.

In practice, it simply won't happen. Politicos of both parties lack the stomach for the fight. Taxpayers pay through the nose on the way up, watching as the public sector bloats itself with huge additional layers of fat. Then on the way down we watch again as vital organs are trimmed off and service standards plunge to new depths.


Thursday, December 11, 2008

One Grey Wednesday Coming Right Up

Don't mention the currency war
There's some previous here. The outburst from the German Finance Minister has strong echoes of several previous contretemps, and not just over Poland. In particular we should recall the events leading up to Black Wednesday - our ejection from the ERM in 1992.
One of the reasons we blew out was that Germany was pursuing a policy of strict monetary control (ie high interest rates) to contain the inflation fallout from German reunification. Our economy was in the pit of recession and simply couldn't handle it.
We begged Germany to cut their rates, especially at a rancorous meeting of EU finance ministers (Ecofin) the previous weekend in Bath. Norman Lamont was chairing that meeting and here's the New York Times' account:
"Lamont grilled Schlesinger [head of the Bundesbank] as if he had hauled him before a select committee of the House of Commons. The German civil servant was deeply offended.
"Every finance minister here wants you to cut your rates," Lamont shouted at Schlesinger, unimpressed by the latter's explanation that cuts were not possible without unleashing inflation in Germany and the rest of Europe. Lamont would not take no for an answer and pressed for a commitment. Schlesinger flushed, stood up and made as if to head for the door. Finance Minister Waigel had to put out a hand to stop him and take the floor in his defense.
"My dear Norman," Waigel warned Lamont, "you have asked us that question four times, and four times we have given you the same answer. We do not see the need for wasting any more time."
Three days later the market delivered its devastating verdict.
But, you say, we're not in the ERM any more, so we don't need to worry. Let the Germans go hang.
While it's quite true that sterling can float freely (thank God), let's not imagine it's a free lunch. As we've blogged before, every time sterling falls, all of us get poorer. Our imports get more expensive, but our incomes don't rise. As our currency crumbles, international investors take fright and demand a higher price for all that cash we need to borrow. And if sterling goes for a real walk - as it is right now - they might stop lending altogether. Which would be a tad awkward.
What the German Finance Minister is really telling us is that we need to brace up and take some pain. We've overspent and overborrowed, and the day of reckoning is at hand. Trying to spend our way out of trouble will only make our situation worse - we simply don't have the financial standing to sustain it.
He's also telling us something else: vainglorious claims by Herr Brown to be speaking for the entire civilised world are total sauerkraut.

Wednesday, December 10, 2008

Don't Care For Germans, Fawlty

Little Lord Peston is appalled.

How dare the Hun criticise our Beloved Leader! How dare the German Finance Minister say:

"The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing. Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?

All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.

When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"

The morning, the British Ambassador in Berlin handed the German government a final note, stating that unless we heard from them by eleven o'clock that they were prepared at once to withdraw their statement of a bleedin' obvious but deeply inconvenient truth, a state of extreme embarrassment would exist between us.

And remember - this particular Bosche is a socialist. Just like the Beloved Leader.

Going Green And Scaly

Is this what you want?

BOM readers will be familiar with the green and scaly option.

It goes like this: do you want to install our recommended CozeeHomeTM pay-nothing-til-next-September double glazing solution, or do you want to die from hypothermia this winter? And do you want to make smallvirtuallyimperceptible changes to your disgustinggasguzzlinglifestyle now, or do you want to die in a globalinfernofamineflooddisaster in 2033? And do you want to support the right-minded, commonsense, all-men-of-goodwill policies we are pursuing, or do you want to go green and scaly?

We had a good example on BBC TV News last night. Their Economics Editor Hugh Pym (who I'm sure used be one of Bertie's chums in Jeeves and Wooster) explained the difference between Labour and Tory fiscal policy. It turns out that Labour policy involves a £20bn investment (sic) in the economy, whereas Tory policy does not. Tory policy involves not helping the hard working families down in the village. It means standing by while they starve to death.

Clearly Hugh thinks this "investment" will have a pay-off. But will it?

For one thing, it's actually pretty small, even peripheral, in terms of the crisis now engulfing the village. Many of the villagers have borrowed far too much - more than any other village for miles around - and their panicky priority now is not to go on spending, but to pay down their debt. £20bn against a £1.5 trillion personal debt mountain and massive job uncertainty, is not going to change that priority. Especially as the hard-pressed village money-lenders are now calling in their loans.

Second, this "investment" is very short-term: it will all have to be repaid in a couple of years. Indeed, the main message of Darling's recent maxi-Budget was not his investment, but the appalling realisation that the public finances are in far worse shape than even the pessimists had supposed.

We've blogged before on Ricardian Equivalence - the idea that public debt is deferred taxation and so debt funded tax cuts fool nobody - and last week veteran FT commentator Sam Brittan passed his damning judgement on Darling's budget:

"The November 24 pre-Budget report turned out, at best, a damp squib and, at worst, counterproductive. Little of the discussion was on the fiscal stimulus but rather on the subsequent tax increases required "to pay for it". If an old-school economist had deliberately tried to arrange a demonstration against fiscal policy, he could hardly have done better."

We disagree with Sam's contention that Darling should have just kept quiet about the post-election fiscal tightening - we surely ain't that dumb - but he's right to call for the establishment of a more sustainable fiscal and monetary framework (including a set of Friedmanite fiscal rules emphasising the extent to which taxpayers are willing to fund government services).

In any event, there is widespread agreement that the demand boosting impact of Darling's package is likely to be quite small.

The much more pressing problem is the availability of bank credit. As the National Institute for Economic and Social Research puts it today:

"The Government faces the real risk that, despite the measures it took in last month's Budget, output will fall more sharply than it expected to the end of next year. The main problem that it needs to address very urgently is the availability of bank credit..."
In this world, the truth is that fiscal "giveaways" are almost irrelevant in terms of lifting the economy. But on the other side, they do increase our public debt, making our longer-term path to recovery even more difficult.

So why weren't Dave and George able to get that across on the BBC?

Part of the explanation is that nobody has quite found the right words.

But more fundamentally, as we've blogged many many times, the tax-funded BBC is a left-leaning statist organisation. They will always see public spending as "investment", and they will always see themselves as taking the part of the helpless villagers against the barons.

Or taxpayers as the rest of us call them.

Tuesday, December 09, 2008

Sizing Up The Axe

When it comes to the politics of fiscal crises, two months is a millenium. At the Tory Conference in October we were once again bemoaning Dave and George's unwillingness to contemplate public spending cuts to fund lower taxes. But today, Dave very nearly promised to do precisely that. He said:

"I can announce today that in order to keep spending at a responsible level and to ensure the quickest possible end to the recession and the strongest possible recovery, we will not match Labour’s new spending plans for 2010 and beyond.

Only by taking this step can we ensure that the Government lives within its means and only by ensuring that Government lives within its means can we build the in the future."

Now that's more like it.

The next question is how much to cut?

Over the last decade, Labour's fiscal incontinence has inflated our public spending relative to the OECD average by about 4% of GDP (see chart above). So just to get back level with our immediate competitors - never mind China and India - we need to cut spending by a minimum of £50bn pa. Which is 8% of this year's total.

Unfortunately, since we suggested that £50bn target in October, our situation has got much worse. In particular, according to the Treasury, our economy has gapped down by 4%, reflecting the fact that some key growth sectors - eg financial services - have been incinerated. They are unlikely to rise again anytime soon.

So to take account of that, our cuts target is now more like £70-80bn pa (11-13%).

However you look at it, that is a shedload of cash. It is way bigger than our entire education budget, and getting on for what we spend on the NHS. But that's a measure of the massive damage Labour has inflicted on us.

Can it be done?

Well, clearly not all at once. And clearly, in an ideal world nobody would start from the pit of 70s style recession. But if we're ever going to rebuild that low tax, low debt economy that will be able to compete in the world and help create jobs wealth and opportunity for our people, we're going to have to find a way.

Of course, some people - such as Oliver Letwin - reckon you can't cut spending at all, and no government has ever succeeded. But actually that's not true - Callaghan's government cut it by 4% in real terms between 1976-77 and 1977-78. And crucially, he did so because we'd been introduced to TINA (accompanied on that occasion by her friend IMF).

We're pretty sure TINA is heading our way once again, and this time she's going to be really mad.

No more faffing around. We need to get ready for her.

Step one is to get real about just how much spending we need to cut.

Step two is to decide how we're going to do it. It can't all be done immediately, which is why we need those full fiscal rules we've blogged so often.

And step three is to decide what goes. We'll be blogging some suggestions over the next week or so.